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Express covenants - overview
In addition to the obligations that are implied into every contract of employment, further obligations may be imposed on an employee by way of express terms:
in the contract of employment or
in an agreement collateral to that contract
These are usually referred to as ‘restrictive covenants’.
Restrictive covenants may impose a variety of obligations during the course of the employment relationship:
There is an implied duty preventing employees from undertaking extraneous activities during working hours, but no such restriction at other times: an express covenant is needed to restrict the employee's activities during his spare time.
Such covenants may seek a total or a partial ban on spare time business activity: total bans are more likely to be thought unreasonable for part-time employees. Partial bans should identify the precise activities which are banned: usually those seen as competitive.
Particularly where total bans are sought, express exceptions to the ban may be helpful. These may include:
permitting the employee to invest up to a specified limit in listed companies
permitting spare time business activity where the advance (usually written) consent of the employer is obtained. Employees often seek to ensure that written consent will not be unreasonably withheld, but employers may well wish to resist such a condition
For further details, see Restricting employment with third parties.
Since the implied duty not to disclose confidential information ceases when employment ends, the only way of protecting confidential information (as opposed to trade secrets) after employment is by express covenant.
Confidentiality clauses often cover disclosure during employment too, which has the advantage of making the employee’s obligations clear from the start of employment.
There are two principle issues in drafting confidentiality clauses:
defining the type of information covered by the covenant
ensuring the covenant only protects information properly categorised as confidential
Confidentiality clauses that are too wide and/or too vague are likely to fail:
it must be clear to the employee what is protected from disclosure
if the clause is too wide a Court may strike it down because it goes beyond what is legitimate
only precisely worded confidentiality clauses will enable Courts to issue precise injunctions, which are capable of being policed
Generally confidentiality clauses should be limited both as to period and geographical ambit.
For more information, see Protecting confidential information.
When an employee is due to leave, there may be concerns that if he continues to work during his notice period, his contact with key clients and suppliers will increase the risk that they will follow him to future competing employment. Terminating the employment immediately is not an answer, as this would potentially free the employee from the express and implied duties that subsist during employment.
Garden leave clauses address this problem by keeping the contract of employment alive during the notice period, but also removing the employee from contact with clients and/or suppliers. Under such clauses the employer is able to require the employee not to attend for work at the employer’s premises or to perform any work duties or to have any contact with clients and/or suppliers.
It is almost always better to include an express garden leave clause rather than rely on any inherent contractual right, as the likely outcome of any successful challenge to the employer placing the employee on garden leave is that the employee would be released from all post-termination covenants.
Such express clauses should:
only allow employers to implement garden leave after notice has been given
expressly remove any obligation to provide work
allow the employer to exclude the employee from work premises
allow the employer to prevent contact with clients and/or suppliers
provide that the employee’s remuneration (including variable benefits) will continue as normal, or as near normal as is feasible
not place an employee on garden leave for unreasonably long periods, as this might cause his de-skilling
It is also possible to introduce quasi garden leave clauses, which provide for altered and/or reduced duties rather than actual garden leave. This allows the employer to continue to keep an eye on the employee in the workplace, whilst also keeping him away from clients and/or suppliers.
Restrictive covenants may also seek to impose obligations after the end of employment:
For more information, see Garden leave clauses.
Once the employment has terminated, the employee will be free, in the absence of any express covenant, to compete with his former employer, to use his employer’s confidential information (but not trade secrets), to solicit business from his employer’s customers, and to solicit his employer’s staff to join his competing business. Because of this it is common for employers to seek to restrict post-termination activities with express covenants.
The law places significant restrictions on express covenants in restraint of trade: a person is generally entitled to trade when, where and in what manner he wishes. However, exceptions to this doctrine allow the creation of lawful and enforceable post-termination restrictive covenants.
Types of post-termination clauses
These commonly include one or more of the following:
Non-compete clauses: seeking to prevent the employee from undertaking competitive activity within a particular geographical area centred on where he previously worked. Such clauses must:
clearly define the area. If no area is specified, the clause is likely to be viewed as of worldwide application, and unlikely to be enforceable
restrict the area appropriately. Normally, they should not cover areas unconnected with the employee's activities whilst employed. An identically sized area is more likely to be enforceable in a rural region than in a city, since in the latter case far more competing businesses will be covered
restrictively define the prohibited activities. They should not cover activities with which the employee has no previous involvement
be of no greater duration than is reasonable
Blanket non-compete clauses are blunt and usually difficult to enforce. Clauses can instead list certain named competitors with whom the employee may not work.
Non-solicitation/non-dealing clauses: stopping an employee exploiting knowledge of customer or supplier lists and/or his own relationship, built up during employment, with those customers and suppliers:
such clauses are usually more defined than non-compete clauses, and hence more likely to be enforceable
non-dealing clauses are to prevent the employee from carrying out any business with the relevant customer
non-solicitation clauses are to prevent employees contacting customers to persuade them to do business: solicitation involves some element of persuasion
normally a contract will contain both a non-dealing and a non-solicitation clause rather than just one or the other
such clauses should identify with precision the customers or suppliers in respect of whom they apply. This can be done by listing them, or by reference to the employer’s business and the employee’s activities during the course of his employment. They should not cover customers/suppliers with whom the employee had no previous contact
potential customers and/or suppliers may also be covered, but only where:
there had been substantive negotiations with them before the termination of employment
the employee had had some involvement with them
the clauses should be of no greater duration than is reasonable
Non-poaching clauses: these are particularly useful with senior employees who are more likely to have influence over junior staff, and may be able to persuade them to leave the employer. In drafting such clauses, one should consider:
the nature of the employer’s business
the nature of the work done by the employee
the nature of the employer’s workforce
They should be no wider than is reasonable: eg blanket non-poaching clauses are likely to be unenforceable if the employee only ever worked with one section of the workforce.
Such clauses should be of no greater duration than is reasonable.
For further details, see Post-termination clauses.
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